The Most Interesting Life Insurance Article Ever

Wednesday, February 23, 2011

Dan Forbes, GoLocalProv Financial Expert

Given the subject matter of “Life Insurance”, trying to come up with the most interesting way to present it might seem a little ambitious. But then I thought, “Hey, I’ve looked forward to almost every life insurance article I’ve ever read with the same vigor as changing my kids’ diapers.” So, if you’re going to continue reading this, I’m going to have to spruce it up a bit.

Do you even need life insurance?

This is a good place to start. If you have a spouse, you should probably have life insurance. If you have a mortgage and/or other debts, you should have life insurance. If you have young kids, you should definitely have life insurance. If you have a pension, you should at least look into life insurance to protect its payout options. If you are lucky enough to still have an estate tax problem, you probably should have life insurance. BUT – if you have no dependents and no driving desire to leave anyone a large sum of money, there’s a good chance you don’t need life insurance. It’s pretty simple. Individuals have an economic value and there’s a chance that this value can be eliminated at any time (death). It’s up to you if you want to move that risk over to an insurance company for a premium.

Start with Term Insurance

If you’ve just left the cozy confines of your parents’ home and are starting out in the working world, term life insurance is probably where you want to start. Younger people can get lots of coverage for an extremely reasonable price. If you’re 30 years old and in good health, you can expect to pay around $300 per year for $500,000 of 20 year level term coverage. Life insurance agents will argue that only a small percentage of term insurance actually pays out. You know what I say if it doesn’t pay out? Great, you weren’t a part of that small percentage that died!!
The other secret about term insurance is that if you do have it in place, you should review it and possibly replace it periodically. Many times you can insure yourself with a new term policy for the same premium, while extending your coverage for additional years.

What about Permanent Insurance?

There is a place in this world for permanent insurance, despite its label as the “expensive” life insurance option. It is more expensive, but that’s because as long as you pay the premiums, it WILL pay out. The higher your income tax rate, the better the policy works, and it can provide a nice “safe” account that’s not correlated to your investment returns. If you have a permanent need (pension protection, tax liability) or just want to guarantee that you leave your heirs a lofty inheritance (Dad, are you reading?), permanent insurance is the way to go. And I’ve seen plenty of Whole Life and Universal Life policies work for clients. I’m still waiting to see that Variable Life insurance policy that was worth the expense.

OK, so this may not have been the most interesting life insurance article ever. A few references to Lady Gaga or the Wisconsin pension situation may have helped. As with all aspects of your financial plan, take the common sense approach to life insurance. Figure out what your ideal coverage amount is and what you can afford to pay in monthly premiums. This will guide you to which type of policy you should buy. And then you sit back and hope you never have to use it.

Dan Forbes is a regular contributor on business financial issues. His office is in Providence, RI. He leads the firm Forbes Financial Planning and can be reached at [email protected]